Home Central Banks Fishing Failure and Tourism Continue to Push Icelandic Rates Down

Fishing Failure and Tourism Continue to Push Icelandic Rates Down

Stockholm (Ekonamik) – This week, the central banks of Iceland, Israel, Hungary and South Korea held their monetary policy meetings to decide on the path of interest rates. Of the four banks, only the Icelandic monetary policy committee (pictured) decided to cut rates.

“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower the Bank’s interest rates by 0.25 percentage points,” read the August statement from the central bank of Iceland. “The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 3.5%.”

Contrarily to recent rate cuts in Indonesia, Sri Lanka, Mexico, Namibia, India and Thailand, the statement by the central bank made no reference to international developments, be it the US-China trade war, Brexit or political instability anywhere in the world. The only foreign consideration was a passing comment about exchange rate markets being “balanced”.

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Otherwise, the central bank was entirely focused on domestic conditions, which experienced an abrupt downturn at the end of March after tourism fell and, most importantly, after an extensive search by fishermen and researchers found no Capelin (Mallotus villosus) in Icelandic waters. According to Arctic Portal, “Capelin is considered the second most ecologically and economically important fish in Icelandic waters, with the yearly catch sometimes reaching over 1 million tonnes”.

This led the central bank to cut rates from 4.5% to 4% at its May 2019 meeting and again to 3.75% in June. On that occasion, the Icelandic central bank noted that following the “capelin catch failure”, “output is now forecast to contract by 0.4% this year instead of rising by 1.8%, as was forecast in February.”

Since then, the contraction has been revised downwards, “this year’s economic contraction will measure 0.2%, slightly less than was forecast in May,” the central bank noted in August.

The assessment echoes the June view that “stronger private consumption in Q1 and leading indicators could imply that domestic demand has been more resilient than previously assumed. On the other hand, the outlook is for the contraction in tourism to be deeper than previously expected.”

Image courtesy of the Central Bank of Iceland


Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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